As one politician moves to regulate companies offering workers’-comp coverage, the systemic problems—along with disability claims—linger
Fixing workers’ compensation comes down to changing the minds—and strengthening the spines—of a handful of power players in Sacramento. These powerful few must find what we pundits sometimes call the “political will” to take action that goes against their own short-term self-interest.
This point was made rather amusingly on March 10 when Democratic state Senator Richard Alarcón of Los Angeles—who, along with a few other key legislators, bears responsibility for dragging out California’s workers’-compensation crisis in 2003—made a boob of himself in public.
Alarcón misunderstood an e-mail, sent to politicos whose actions will determine whether Sacramento fixes this crisis or dumps the mess in the laps of voters in November.
The informational e-mail, sent by the Workers’ Compensation Insurance Ratings Bureau (WCIRB), explained that in early 2003, the WCIRB had been wrong about how many business and government entities were “self-insured”—which is one way the big employers, such as Safeway or Los Angeles County, try (but fail) to control workers’-comp costs.
The WCIRB said it was wrong in early 2003 when it estimated the size of the workers’-compensation market at $25 billion. It turns out, the e-mail said, that the self-insured market had been $2.2 billion smaller than the WCIRB thought. Moreover, the e-mail noted, piecemeal reforms signed by ex-Governor Gray Davis brought $4.5 billion in annual savings. As a result, the workers’-comp market in 2003 was $18 billion, about $7 billion smaller than predicted.
Fixing the $2.2 billion overestimate, and confirming the $4.5 billion saved, is good news. It means that the huge $25 billion workers’-comp market from which Governor Arnold Schwarzenegger wanted to cut $11 billion is actually $18 billion in size. Instead of cutting $11 billion, the challenge will be lessened.
But Alarcón, one of many legislators who often attacks business as bad and seems not to understand basic economic concepts like markets, misunderstood the e-mail. He called a press conference to blast a group—private insurance companies—he felt was getting rich off of figures he did not grasp.
Alarcón added together apples and oranges, the $4.5 billion in savings and the $2.2 billion in overestimates, calling both “savings.” Then he insisted this nearly $7 billion wasn’t passed to consumers.
At his press conference, he dramatically accused private insurance companies of gouging and said the earlier overestimate created “an opportunity for insurance companies to overcharge businesses throughout the state of California.” He insisted private insurers roll back their rates immediately.
It’s worth noting that Alarcón needs a lot of media coverage because he is running for mayor of Los Angeles.
Yet his performance was still baffling. Just as state Insurance Commissioner John Garamendi was getting ready to fly to New York to beg a half-dozen insurers who have abandoned insane California to come back, Alarcón was painting them as being in a league with the devil.
When I asked Alarcón why he didn’t withdraw his inaccurate claim of $7 billion in “savings,” he brushed it aside and made new erroneous claims.
Alarcón said the savings included a roughly $1.4 billion downward revision in “gross overestimates last year by the WCIRB that helped insurance spinmeisters justify higher rates. Last year, WCIRB said Assembly Bill 749 [higher pay for the injured] would cost $1.4 billion—a gross miscalculation! … $1.4 billion is not chump change. I want $1.4 billion refunded by the gougers!”
In fact, AB 749 cost $500 million less, not $1.4 billion. And that wasn’t because of miscalculation, but because of changes in the mix of employee claims. And forget refunds. Most costs to workers’-comp insurers surged.
Jack Shannan, a spokesman at WCIRB, said, “Politicians are going to say what they are going to say.”
Sadly for California, private insurers today account for only 25 percent to 30 percent of the market, so there’s little market competition. More than 50 percent of workers’ comp is insured by a special state fund, and 20 percent is self-insured. Two dozen private companies have fled. Proposing to regulate rates surely will drive more away.
While Alarcón accuses insurers of price gouging, his staff has no answer for why costs also skyrocketed in the special state fund or for why the self-insured have crazily boosted their own insurance rates on themselves.
For example, Safeway, California’s second-largest employer, is self-insured. The cost of Safeway’s average workers’-comp claim in California is seven times higher than in Texas. Rates have spiraled accordingly.
Does Alarcón believe self-insured entities like Safeway are gouging themselves?
I’m giving Alarcón a hard time for a good reason. He holds a tremendously powerful position in Sacramento as chairman of the Senate Labor and Industrial Relations Committee. He actually affects millions of real people.
Last year, I watched Alarcón blithely kill a package of solid bills in his committee that would have helped to end the workers’-compensation crisis in California. This travesty went largely uncovered by the media.
Instead of addressing the deep problems in 2003, Alarcón backed so-so fixes that would not upset big campaign contributors. So, he pushed bills to end the overuse of chiropractors and to set fees that control rampant costs at outpatient centers.
The crisis, as Alarcón should know by now, is not caused by the admittedly impressive overcharges by chiropractors and outpatient centers. The fact is that California has the worst return-to-work rate for injured workers in the United States. Our “temporary disabilities” last an average of 23 weeks—this, even though we’re a service state, not an industrial belt. Our injuries are less severe than Pennsylvania’s, with its manufacturing, and Oregon’s, with its logging.
In a study of 12 big states, California sent far fewer workers’-comp injuries to hospitals— indicating that California’s injuries are, indeed, less severe.
Yet California has the third-highest number of claims that end up involving defense attorneys—a good indicator of how many companies are forced into court by trial lawyers pursuing claims that never would be heard in other states. Our average indemnity benefit paid to the partially disabled in 2002 was $21,819—double or triple those of states like Illinois, Indiana, Texas, Wisconsin, Connecticut and North Carolina.
To fatten their 12-percent-to-15-percent cut, California trial lawyers encourage clients to demand payments not allowed in rational states. This strategy pays off handsomely. In 2002 alone, trial lawyers drained nearly half a billion dollars in fees from the system.
In 2003, Alarcón made sure none of the bills that cut the take of the trial lawyers survived his committee.
One of my favorite scams is the way trial lawyers demand—and regularly win from California judges—multiple permanent disability payments for the same injured body part.
Say you hurt your shoulder and are awarded a 70-percent “partial permanent disability” rating. You will get a fat check for being disabled, in addition to medical benefits. If you get another job and re-injure the same arm—and this holds true even if you were judged 100-percent disabled—in California, you can go to court and get another permanent disability on the same arm. We have citizens with necks, arms or backs that are 300-percent disabled.
Each new disability means another easy fee for the attorney.
Republican state Assemblyman Abel Maldonado of Santa Maria, author of a bill containing Schwarzenegger’s reforms, says that even the labor unions are involved in serious closed-door negotiations to truly fix workers’ comp after years of protecting the trial lawyers.
But Alarcón and some key Democrats are resisting. It’s a pretty sad situation when California’s normally rigid labor unions are more reform-minded than the supposedly progressive Democrats.
“I really do see some movement from labor, which is willing to cooperate with the governor and doesn’t want to see this on the November ballot,” said Maldonado. “But we have people like Mr. Alarcón and members of the Legislature who don’t want to buck the applicants’ attorneys. That is exactly what it is all about—that trial lawyers are a big source of campaign funds.”
Maldonado says the Democratic leaders, Senate President Pro Tem John Burton and Assembly Speaker Fabian Nuñez, are trying to find a way to compromise. But many other Democrats fear the attorney lobby more than they fear the toll of the workers’-comp crisis on California.
Said Maldonado: “They need to understand the system is broken and it’s hurting the workers, because if you have a small business, you cannot afford to give a raise anymore, or a bonus or even a company picnic, and the choice becomes: Who do we lay off?”
It’s hard to exaggerate the mess here. California has no set dollar value for a given injury, unlike Oregon and so many other states. It is utterly arbitrary, and for that reason, it is bitterly fought out in court.
As the governor has noted publicly, California employers are paying 5.65 cents in workers’-comp costs for every $100 in salaries. The national average is half of that: 2.38 cents per $100. The difference is going down a huge rat hole.
No other state is so screwed up, although Texas, Illinois and Tennessee suffer from similar loopholes and middlemen sucking their systems dry.
“California has 1,350 claims per 100,000 workers, while nationwide, it’s 400 claims per 100,000 workers,” said Maldonado. “This points to litigation, litigation, litigation. Attorneys are urging people to put in claim after claim. Everybody, including the governor, understands this is what is happening.”
Alarcón is by no means the only obstacle in Sacramento. But he is a pointed example of the cause of gridlock. He helps explain why things don’t get fixed. He shows us why, when leaders operate from fear instead of from strength, the rest of us pay.